New EPA Gasoline Regulation Will Cost $12 Billion

The Environmental Protection Agency (EPA) last week unleashed a new regulation on the amount of sulfur contained in gasoline. EPA Administrator Gina McCarthy praised the new regulation as a “benefit worth the burden” citing a projected one cent increase in gasoline prices to American consumers. However the one cent figure cited by McCarthy is far from accurate as evidenced by a recent study by Baker & O’Brien Incorporated. The study found not only would the cost of gasoline prices increase to potentially nine cent per gallon but that the new rule would require $10 billion in capital costs and an annual compliance cost of $2.4 billion. According to American Petroleum Institute (API) Director Bob Greco:

“This rule’s biggest impact is to increase the cost of delivering energy to Americans, making it a threat to consumers, jobs and the economy…it will provide negligible, if any, environmental benefits. In fact, air quality would continue to improve with the existing standard and without additional costs.”

The Baker & O’Brien study undertook a refinery-by-refinery approach and found that the new regulation on sulfur would have immediate and far reaching consequences for American refineries. Compliance costs alone would increase to $2.4 billion annually, which in turn will be passed to the consumer in the form of a 6-9 cent per gallon increase in the cost of gasoline. The effects of the new regulations on American refineries are listed below:

24 refineries would be forced to install and upgrade new fluid catalytic cracker (FCC) feed hydroteaters;

13 refineries would be forced to install new FCC gasoline hydroteaters; and

33 refineries would be forced to expand and upgrade their existing FCC gasoline hydrotreaters.

The required capital investments referenced above are projected to costs American refineries upwards of $10 billion in capital costs. This $10 billion in capital investments costs is only complimented by the $2.4 billion in annual compliance costs American refineries will be subject to. Accordingly, domestic refineries will be required to shift the costs of compliance onto the shoulders of consumers who will undoubtedly see an increase in gasoline prices 6-9 times higher than the 1 cent projected by the EPA. Furthermore, some refineries may be forced to cut jobs due to these multi-billion dollar compliance and investment increases.

In addition to increased gasoline prices for consumers, the Baker & O’Brien study found that the new regulations would require an increase in hydrotreating operations. As evidenced above, the $10 billion in capital investment costs will be related to hydrotreater operations. This increase in hyrdotreating operations would contribute to a higher annual amount of greenhouse gas emissions compared to previous amounts due to the energy intense nature of such operations.

While the EPA has justified the new regulation on sulfur by citing increased air quality and a 1 cent increase on gasoline prices, both of these justifications are unfounded. The energy intensive hydrotreatment operations pursuant to the regulation will actually increase CO2 emissions and cost refineries $10 billion in capital investments. The regulation will also burden refineries with $2.4 billion in annual compliance costs which will be passed to the consumer as a 6-9 cent increase per gallon at the pump. All in all the new regulation on sulfur could increase the cost of energy to Americans and threaten consumers, jobs and the economy.